6 Questions to Ask Your 401(k) Advisor to Know What Kind You Have

Salesman Knocking on the Doorchecklist_400_clr_2328

Being registered to sell investments does not mean that you know anything about a 401(k) other than it has investments. Some advisors to plans are investment generalists and not 401(k) savvy. The few advisors that focus on 401(k)s primarily focus on helping the company’s decision-makers vs. focusing on helping employees use the plan to retire comfortably. Here are some questions to ask to find out what kind of advisor you have.

Are you an independent 401(k) advisor?

A 401(k) advisor that is unbiased and independent should understand the landscape of options. Some companies that advisor work for limit the options they can show you. Some providers limit the investment options available based on contractual relationships, not because the investments are good.  Beware of the misuse of the term open architecture. It may just mean less limited. If the advisors business card is the same as the company that sells the retirement platform and the investments inside them, they are not.

Will you get paid fees or commissions?

Advisors that sell based on a fee schedule, usually one that has tiers, are registered investment advisors or one of their representatives. These advisors are not incentivized to recommend investments that pay a higher commission. While you may select an advisor that receives a commission, it is good to know what to be on the lookout for.

What retirement plan designations do you have?

Advisors committed to professionalism attain a specialist designation such as an Accredited Investment Fiduciary, Professional Plan Consultant, Certified Retirement Plan Specialist or Qualified Plan Financial Consultant (QPFC). These designations have continuing education requirements to keep their designees up on the latest in their field. Some firms, such as LPL Financial, have special internal screens such as the Retirement Plan Consulting Program.

Do you have personal retirement planning designations that can help my employees’ retirement plans?

The purpose of any plan governed by the Employee Retirement Income Security Act is providing retirement adequacy. Advisors with designations such as Certified Financial Planner or Chartered Retirement Planning Counselor understand the many ways to turn 401(k) savings into retirement income.

Will you share in my fiduciary responsibility or am I on my own?

This type of advisor is known as an ERISA 3 (21) investment advisor. You have one only if you have a specific document that says so. I recommend having a qualified ERISA attorney review the document to be sure it says what you believe it does.

Are the tools us use to help me monitor my retirement plan independent or ones developed by the investment company?

If your advisor has said all of this and doesn’t have tools to back up the independence claim or how they will strengthen your fiduciary toolset, I would go back to my first point. This investment monitoring report and this fee report will give you an idea of one form of an independent report.

These questions will help you know the lay of the land regarding this advisor and any others you may consider. If you choose a commissioned one that limits your investment access, be sure to do the extra work required to show your employees are getting what they pay for. If you choose an independent, with independent tools and all types of designations that doesn’t mean no work according to the Department of Labor. It should mean a much shorter list of things to be concerned about.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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Posted in 401k advisor, 401k Fees, 401k Monitoring, Fee monitoring, Fiduciary duties, Investment Monitoring, Provider monitoring, retirement plan education, Retirement planning | Tagged | Leave a comment

7 ways to tell it’s time to cut ties with the status quo 401(k) advisor

401k Advisor 401k Advisor

Sticking with the status quo 401(k) advisor is easy.

You may say it’s the devil I know. Unless you are 401(k) provider or ERISA attorney you may not be the best judge of 401(k) devils. You shouldn’t be. You should be the best judge in your core business. Here’s some reasons you may be sticking with a devil of a 401(k) advisor and the reason to change.

The 401(k) advisor is our client or brother-in-law.

If your advisor is our brother-in-law how can we change? Aren’t advisors all the same anyway? Let the brother in law get paid for helping the employees could be one answer. There are several functions that an advisor can get paid to do. Let the brother-in-law do the one that their skill set is best lined up to do.

We have a big well-known platform provider (record-keeper/investment firm) that is handling it?

You may have picked a firm because of their reputation for good investments or because they bundle their investments with administration. What happens if the investment today turn sour tomorrow? Will they fire their own portfolio managers and hire new ones? Will they voluntarily switch you to another providers while they get their act together? Might they change the way they evaluate themselves so that they will look good in your eyes and stick to their status quo?

Having the budget to advertise on expensive media means you have the money and have decided it is in the shareholder’s best interest to do so. It does not mean that your investments, 401(k) administration, 401(k) advice and plan design are the best.

The 401(k) advisor is handling it?

What are they handling specifically? Some employers I have talked to seem to believe that it includes services which were never specified. Be sure to understand the services provided by the investment advisor. The law is not so kind (Google 401k lawsuits). Does your advisor have a menu of services or a specific contract that makes them a fiduciary, like you? If so, has your ERISA attorney reviewed it?

Nobody’s complaining about the 401(k).

Bernie Madoff didn’t have complaints from his investors either. Now there are many voices saying someone should have done more due diligence. Just like you, your employees hare busy working and living their lives. They may be afraid of complaining for fear of losing their jobs. Former employees that continue to participate in your plan have nothing to lose. However, their complaints are likely to be directed at attorneys and the Department of Labor’s investigators.

The 401(k) is good enough.

Is that a feeling or a quantified measure? In manufacturing we have plus or minus tolerances to tell us when it is enough. Does good enough mean that 90% of our employees are on track to retire or that 90% of our investments pass our investment policy statement benchmarks.

I picked it, so it must be good. What is the measure of good? The 401(k) is curious in that the employees and Department of Labor are interested in providing adequate retirement income. The company may be interested in perceived employee benefit accomplished with as little out of pocket costs and ongoing time. This often leads to a decision that starts in the CFO’s office that gets moved into HR for any ongoing administration. The reputation then gets based on the latter rather than the best plan to get employees on track to retire. The investment selection process should not be about reputation, but by independent facts. Oh well, my bad or I’m sorry for your investment loss

We’ve sunk money in it.

In this case, the majority of the money is not the company’s- it’s your employees. It is your duty as a responsible plan fiduciary to monitor and replace bad investments and service providers.

Does your 401(k) advisor know more about the 401(k) than you do?

If not, it is time to get a second opinion.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Fees, 401k Management, 401k Monitoring, 401k Review, Behavioral finance, Fiduciary duties | Leave a comment

401k Fiduciary (ERISA Fiduciary)- Rational Robot or Human

ERISA Fiduciary                     ERISA Fiduciary

As a 401(k) fiduciary (ERISA fiduciary) aka plan sponsor, your day job (CEO, CFO, HR) is increasing your firm’s bottom line. It is not learning the ins and outs of the laws for the Employee Retirement Income security Act (ERISA) that govern retirement plans. However, the Prudent investor Rule requires a fiduciary to invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust [and] and in satisfying this standards, [to] exercise reasonable care, skill and caution.”

Who’s got time for that? As a rational person, if you had time, you would learn the laws that govern the 401k you are liable for running. You may even become an Accredited Investment Fiduciary. You would smell out conflicts of interest like the one that exists if you hire a client of your firm to be your plan’s advisor. It is clear to see why that is in your company’s interest to do so. But is it in your employee’s? If you don’t pay all the fees, such as the cost of the investments, you have a financial risk as this conflict is expressly prohibited. Companies have experienced multi-million dollar judgments when they chose to pass on fees to their employees that they could not show benefitted the employee (Google 401k fee lawsuits)

As a human, a 401(k) fiduciary AKA President, Managing Partner, CFO and VP HR, takes the path of expedience. Pick a name brand investment firm or advisor from a well-known financial company and assume that they know what they’re doing and move on. As both a fiduciary and a participant of the plan, I have not found someone that could decipher the various types of fees disclosed in both their company and participant disclosures.

While you may have heard something about monitoring, you likely believe that should be included in what your employees are paying your broker for. However, it may not be in the interest of the broker to reduce your fees. If we are like everyone else, should that anonymity be safe? You would have an independent reports on your providers, investments and plan that help you prove to your employees that you are looking out for their best interest.

As a rational participant, what is your personal retirement plan?

  1. Do you know how much you need to save per paycheck,
  2. How many years?
  3. What rate of return to reach your retirement income need?

This gets more complicated if one factors in inflation, health care and long term care considerations. Does this mean that the fiduciary as a participant is not rational? I find that just like the employees you watch out for, you have not had the time to either to become retirement experts or find a specialized advisor to help you calculate. Pre-401k companies sought out actuaries who would do the calculations and work with an implementation team to make the necessary annual adjustments to savings and investments.

The media, 401k research firm, BrightScope.com, and the ERISA cops, the Department of Labor and IRS, don’t care much about fiduciaries as humans. They see you as rational person that knows the 401k laws and compliance.

I believe you need to get a plan/provider review by either an attorney ERISA expertise or an advisor that is willing to share in your liability. It wouldn’t hurt to get your ERISA attorney to read the advisor’s contract too.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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401k risk sharing: Are you on the 401k risk island alone?

401k risk 401k risk

The majority of companies are not working with a retirement plan advisor/consult that takes on any 401k risk. While they provide recommendations, the laws that govern 401k plans say that you made the decision. In fact if you Google “fiduciary and broker/dealer” you will find that many of those firms do not allow their brokers to work on retirement plans for fear of being deemed a fiduciary. Some registered investment professionals take liability for their recommendations while some do not. The term for being liable is fiduciary. You doctors and attorneys are fiduciaries. If you could have a fiduciary adviser for the price of one that’s a non-fiduciary why wouldn’t you take it?

But what about the recordkeeper? Don’t some offer warranty’s? The overwhelming majority of recordkeepers, the company you outsource the majority of administrative functions, simply take direction from you. In the fine print, you will find that the protection you may have assumed isn’t there. The Department of Labor’s latest press release on QDIA’s discussed next will explain.

401k Risk Safe Harbors with Strings

Are you aware that by choosing a qualified default investment alternatives (QDIA) you have not completely reduced the risk? That is because it is your responsibility to scrutinize your choice of a qualified default investment alternative against available choices not just at the time you selected your provider but on an ongoing basis. Google “EBSA qualified default investment alternatives February 2013” to get their news release. The last sentence says “Plan fiduciaries should document the selection and review process, including how they reached decisions about individual investment options.”

401k Risk Transferred to an ERISA 3 (38) Investment Manager

Wouldn’t it be simpler to choose a portfolio manager that actually takes on the risk of their qualified default investment alternatives and you just need to oversee them. Moreover, why wouldn’t you hire an advisor that will work for your benefit, taking on liability, to help you oversee the investment manager that takes the specific liability for the investments? I call that increasing your risk adjusted results. Many results look good until the light of risk shines down.

Get Your 401k Risk Assessed with a 401k Review

Waiting until you have a stroke is not the best time to go to a doctor. When you go see a general practitioner they check your blood pressure, temperature and resting heart rate (at least mine does). Then they ask “why you are here today?” The process is a risk reduction measure in case you walk out of their office for some obvious issue that they will be accused of not uncovering. Stokes are known as a silent killers because they typically go undetected unless someone does a diagnostic or the patient has a stroke. As a benefactor of high blood pressure medication, I am glad that my issue was discovered during a routine diagnostic.

You can use Envision 401k Architects or another independent, investment advisor representative willing to share in your liability to help diagnose your 401k risk. While you cannot completely rid yourself of all 401k risk, it makes no sense to take on unnecessary 401k risks.

Please email us if you are interested in being invited to one of our presentations on managing your risk.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

 

Posted in 401k Review, 401k Risk, Employer sponsored retirement plan risk, ERISA 3(38) Investment Manager, Fiduciary duties, Investment selection | Leave a comment

401(k) fees and providers: Evidence-based provider monitoring

Department of Labor Investigator                    Fiduciary caught in breach

A federal judge ordered the president of Columbus-based Clark Graphics, Mary Clark, to restore $505,551.46 to the company’s two employee retirement plans. The order requires the restoration of all plan losses for which the defendants are liable plus appropriate interest. The Department of Labor (DOL) asserted that “Clark Graphics’ owners …failed in their fiduciary responsibilities as plan trustees by neglecting to monitor the actions of the plans’ administrator.” Imagine now that the DOL walks into your office and asks you to show evidence you monitored your providers and their fees. What would you do?

Are you 401k fees high, average or low?

BrightScope, an independent 401(k) research firm, provides an online comparison of the fees you authorize your employees pay against similar plans. Comparisons typically are available for plans that have more than 100 participants. Be sure to go to their website and type in your firm’s name. Be sure to note that they provide an overall score and a specific evaluation on fees. You may score high score relative to other plans but may find that your fees are high. If you feel that your fees are okay, then you should be prepared to defend that position to current employees, former employees and their lawyers, as well as the Department of Labor.

BrightScope attempts to calculate the effect of the plan’s deficiencies on the employee. The Department Of Labor notes that the difference of just one percentage point in fees (1.5% as compared with 0.5%) over 35 years dramatically affects overall returns. If a worker with a 401(k) account balance of $25,000 averages a seven percent return, the worker will have $227,000 at retirement with the lower fee and $163,000 with the higher fee, assuming no further contributions.*

Provider monitoring and benchmarking

If you don’t have a benchmark, how do you know how you compare? The 401k Book of Averages provides simple comparison of fees on a low, average and high basis. Should your question be: how do I compare to the lowest and not to average? What is behind what that plan is getting versus yours? The high plan can be justified based on the services received. If your unhappy employee wants to assert that you hurt their plan because of high fees, don’t you want to be armed with the answer? That could help you avoid some big headaches by a class action suit lawyer or an investigator from the Department of Labor.

Is the report you are using today developed by the same people you have outsourced plan administration? If so, do they share in any liability you face (you’ve had that verified by an attorney)? This is a sample of a thorough independent fee monitoring report.

* February 2013 Press Release, “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries”, U.S. Department of Labor, Employee Benefits Security Administration

BrightScope is not affiliated with or endorsed by LPL Financial.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Fees, 401k Management, 401k Monitoring, Fee monitoring, Investment Monitoring | Leave a comment

Do you need an investment life guard (ERISA 3 (38) investment manager)?

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Does your investment guide give you a false sense of security?

It doesn’t seem to be wise to take on risks where there is no reward. Yet, if you are like most plan sponsors you are taking on the risk of investment selection and monitoring in your 401(k) plan. If you don’t have the time or knowledge to understand sharp ratio, revenue-sharing, passive and active investment strategies you may have hired a firm are several firms to do it for you. You may say that you transferred your risk by selecting a well-known investment or insurance company. Moreover, they may have told you that you have some kind of fiduciary warranty. Can you answer no to all of these risk questions?

  • Does your plan provider also sell investments?
  • If so, are they your default investment choice or represent the majority of investment choices?
  • Does the broker for your plan also work for the investment provider?
  • Do they provide you quarterly reports based on their proprietary analysis?

If not you are at a higher risk than those who could answer no to all.

Limit Your Risk with an ERISA 3 (38) Investment Manager

An ERISA section 3(38) Investment Manager allows you to delegate your responsibilities and personal liabilities to a firm that takes on the liability. Rather than be responsible for the entirety of your investment menu you have narrowed down your monitoring responsibility to one entity. You can hire a qualified investment advisor, that accepts fiduciary responsibility, to help you monitor the activities of your ERISA 3 (38) manager.

Recent trends in regulatory enforcement and ERISA litigation are leading plan sponsors to examine ways to shift or “outsource” fiduciary risk. The market losses of 2008 have served to underscore this risk, particularly as it relates to investment-related losses in participant accounts. As a result, increasing numbers of sophisticated plan sponsors are asking their advisors to serve as an ERISA 3(38) investment manager and/or conducting searches for those who do. A number of prominent ERISA attorneys attest to the validity of retaining an ERISA section 3(38) Investment Manager. These attorneys include James Baker of Winston and Strawn and Jason Roberts, of the Pension Resource Institute.

My buddy W. Scott Simon, JD, AIFA, has written extensively on the topic. He is the author of “The Prudent Investor Act: A Guide to Understanding,” and writes a monthly “Fiduciary Focus” column for Morningstar. An ERISA section 3(38)-defined “Investment Manager” accepts appointment from a plan sponsor as the plan fiduciary with sole responsibility (and liability) for selecting, monitoring and replacing the investment options offered in a qualified retirement plan. Once this is done properly via a contract, you no longer have any responsibility or liability for any investment mistakes that may be made by the 3(38) Investment Manager. Your do retain a residual duty to monitor the 3(38) Investment Manager.

Please email us if you are interested in being invited to one of our presentations on managing your risk.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

 

Posted in 401k Monitoring, ERISA 3(38) Investment Manager, ERISA plan, Investment management, Investment Monitoring, Investment selection, Investments | Leave a comment

Would you rather have a 401(k) $100,000 balance or a $198,000?

Balanced InvestmentWeighted investment

Assuming that this is not a trick question, hopefully you answered the latter. Recently, I did an analysis of a Chicago law firm with about a $50 million total balance. Had they been in a portfolio based on principles of modern finance and included in the Employee Retirement Income Security Act’s development an employee with a balance of $100,000 in 2001 would have had a balance of $198,000 at the end of 2011! This balance is based on a 60% equity (stock) and 40% bond portfolio*. Had they been invested in the S & P 500 they would have had over $117,000.

Investments or investment management?

Likely you are in disbelief. These modern principles were crystallized at the University of Chicago Booth School Of Business. There is a philosophy based upon much research that shows a path to that result. Likely you have not heard of the names Markowitz, Fama, French and Thaler. However thanks to Google you can quickly find out who they are and which one of them won a Nobel Prize. You may also discover that there is a Center for Research in Security Prices at the University of Chicago.

These results came from investing in a strategic portfolio of 60% stocks and 40% bonds (other portfolios are available). This portfolio uses a disciplined, portfolio strategy. From 2001 to 2011 this portfolio had an annualized return of 6.4%. Lest you think that that was chance, from 1973 to 2011, 11.1% from 1991 to 2001, 9%. This isn’t the only portfolio choice using this methodology. It’s just one that I believe that can fit with many people’s tolerance for the ups and downs of the market and expect to return.

Same access to investments yet different results?

Most news on investing involves focusing on the ingredients and not the recipe. I’m a big fan of of the food show “Chopped”. In that show chefs from various backgrounds are given a few ingredients that they must use along with an access to an extensive pantry. There given some of the finest cooking aids and given 20 to 30 minutes to make their dish. It Is amazing that given the access to the same stuff (information) they come up with wildly different platters. At the end only one is judged to have been the best.

I’ve had many people assume that all advisors, brokers, financial planners, etc. would not come up with wildly different results. This assumes that we all had the same knowledge base and access to the same ingredients, in this case investments. Are you aware that most advisors are working for firms that constrain the investments that they can use or sell to you? I once had someone tell me their proprietary investments would be okay as long as they are good ones. That person also spent thousands of dollars to get an independent opinion to find out if indeed the portfolio that they had been sold was a good one.

As a fiduciary in a retirement plan, it would be a breach of your duty of loyalty to your employees to know a strategy that could have doubled their balance and not to have considered it.

*The hypothetical results shown were based on using a starting balance of $100,000 with no additional contributions. The returns used were the annual returns. This not intended to provide specific advice or recommendations for any individual or plan sponsor. The data used comes from the Balanced Index Strategy Gross Returns Matrix as published by Symmetry Partners.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities offered through LPL Financial. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Monitoring, 401k Review, Investment management, Investment Monitoring, Investment selection, Investments, Uncategorized | Leave a comment

Cash balance plans for retirement planning

Many retirement advisors recommend that you save at least 10% for your future retirement. I believe that you should have a retirement planning professional calculate your number. After that exercise, you may find that you need to engineer a savings rescue.

Retirement planning    Retirement savings

Cash balance plan savings rescue for small business

Let’s say that you are over 50 and need to save $22,500 you can do that with your 401k contribution alone. If you need to save $55,500, you can do so with a profit sharing and 401k combo plan. What if you need to save even more? Enter cash-balance plans. A cash-balance-plan contributions, which vary by age, can be as much as $200,000 a year. In the right situation, the combination of the 401k plus the profit sharing plus the cash balance totals near $250,000 in tax reducing retirement savings.

A cash-balance plan is a defined-benefit plan that specifies the contribution to be credited to each participant and credits investment earnings based on those contributions. Each participant has an account that resembles those in a 401(k) and/or profit-sharing plan. Those accounts are maintained by the plan actuary, who generates each annual participant’s statement.

When participants terminate employment, they become eligible to receive the vested portion of their account balances, as determined by the plan’s vesting schedule. Law firms typically make certain that partner accounts are fully vested.

The advantage of a cash-balance plan

Compared to traditional defined-benefit plans, each partner knows is going in to the plan and what they are going to get out. Employers can designate different contribution amounts for various participants, but there is a restriction on the frequency of amendments unless a valid economic reason exists. For example, if a firm’s profits are not expected to support its cash-balance-plan contribution, then the plan can be amended. A cash-balance plan also can be frozen or terminated. Its important to work with an actuary that understands the rules and customization options.

The first step is to determine your retirement savings needs. If you need to save more than the 401k and profit sharing maximum, then it may be time to call in a cash balance plan to the rescue.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Savings, Cash balance, Fiduciary duties, Retirement planning, Retirement savings | Tagged | Leave a comment

401k review-Are you paying for an audit that you don’t need?

CPA 401K Auditor    Wasting money on 401k audit

Many employers and their designees take their cues on what they need to do from the providers that they select. While the law expects that you would go through a due diligence vendor selection process, many firms simply select a well-known name brand. They may have told you that once the participant count exceeds 100, than the law requires you to have an independent audit done by a CPA. You may also have been told that you don’t really pay an additional cost for terminated employees in your plan. This assumes that most of your plan fees are being paid by the participants. If that is the case you are paying as a participant.

In this case, while the company may not directly be paying for this cost, it exposes the company and you as a fiduciary to unnecessary liability. It’s typically the terminated employees who have nothing to lose regarding charging you with negligence plan oversight that led to their dismal retirement savings.

Does your 401(k) advisor have a terminated employee’s strategy?

The combination of your current employees plus the terminated employees may be the reason that you meet the 100 participant audit threshold. The company can decide to pay for the audit in one of two ways:

  1. The company pays
  2. The company passes the cost on to the participant

First, let’s examine passing the cost on. If you’re passing the cost onto your participants, you may not care. However, with the recent fee disclosure, you now have to explain why are you still having your participants pay for the cost of an unnecessary audit? This is the type of questions that a knowledgeable investigator or an attorney would likely ask. Second, if you are the owner, CEO or CFO and could cut the company’s costs, it stands to reason that you would. Investigators aren’t interested in company costs.

If this is the first you have heard about cutting the cost of the audit, it may be because you providers have conflicts of interest. Unless you talk to an Employee Retirement Income Security Act (ERISA) attorney, independent fiduciary or investment fiduciary, you probably would not be aware of the potential conflicts of interest. If your company already is using an auditor, the auditor who is not a fiduciary, has no interest in telling you that by rolling out your terminated employees you could get rid of their service. Unless the companies that provide your investments are fiduciaries it’s not in their interest to decrease the assets for which they get a percentage.

Fee disclosure 408b 2 (408b2) and Participant Fee Disclosure 404a5

A fiduciary advisor is obligated to tell to share this information. One of the best ways to increase plan assets is by increasing the savings of your employees. It’s been well reported that many financial professionals believe that individuals should be saving at least 10% of their income for their future retirement needs. Very few employees are adequately saving for their retirement. This is one of the first elements of your plan that should be addressed.

I recommend that you seek out an independent fiduciary or fiduciary 401(k) advisor for an independent 401(k) review. If you can cut the cost of the audit, ask them about their strategy for rolling out your terminated employees. This 401k review just might save you a host of problems and money down the road. You never know when a former employee or the Department of Labor might question you on your process for controlling their costs.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities offered through LPL Financial. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Fees, 401k Management, 401k Review, Provider monitoring | Leave a comment

401k Review- Do your 401k providers help manage your risk or increase it?

Fiduciary risk managed     Adding to fiduciary risk

Let’s face it we all hate regulation, especially when it means more work in areas that we aren’t expert in. Recently I talked with a general practitioner physician about her 401(k) plan. She first explained that she already had a financial advisor. As a general practitioner of medicine, she knows that she is not an expert in neurology. The term financial advisor is a generic one it does not indicate that the advisor has any specialty in 401(k) plans. In fact, most financial advisors think that 401(k)s are simply about investments and not about retirement planning that involve both employer and employee.

401k Advisor or Registered Representative aka Financial Advisor (Stock Broker)?

When I asked her if she had received her plan sponsor fee disclosure, she didn’t know what I was talking about. If her practice received it, she assumed that her office manager had it. The law says, as the employer, she is the one responsible not only for making sure that she received it, but also determining its accuracy and whether the fees are reasonable. The reasonable test involves comparing her fees against an alternative.

She then went on to complain that the government’s new rules stopped her office manager from being able to provide financial advice to their participants. That’s not a new rule. I assume she said that because that’s what her financial advisor said. This may be a common misconception by financial advisors that aren’t well-versed in retirement plans. Advisors may be involved with the plan because they are working with the owner on their private wealth. An advisor should understand the intricate details of guiding or advising the specifics of a 401k.

Do you know your fiduciary responsibility?

The 401k rules have always stipulated that the plan sponsor is prohibited from giving advice to participants without taking on liability. If you think about, if someone in your office told you about a health problem they were experiencing and you recommended a specific medicine and they got sick, couldn’t they sue you? Likely you would tell her to go see a doctor. When you say go see a doctor, you actually mean go see a general practitioner. That doctor may then send you to a specialist in the area of sickness. They would not try to treat a urological condition simply to get paid for it. Not only would that be against their fiduciary oath but also potentially cost them dearly in malpractice. Unfortunately many financial advisors without knowledge of retirement plans do not recommend a specialist to their clients.

Many investment professionals that work with retirement plans are doing so in the capacity of a broker. This means that they should not provide advice. You may notice in commercials that are well-known brand name firms that they either use the terms education for guidance, but never advice. Should you find yourself in a lawsuit you will quickly find that these terms while in common conversation might all appear to be the same, from a legal perspective they have different levels of liability.

Investment Fiduciary. Working for Your Benefit Not Their Own. Who Knew?

The law has allowed plan sponsors or employers to delegate portions of their legal liability to firms that were willing to take on that liability. Unfortunately, in our busy days we often assume that those that we pick are necessarily taking on liability for their actions. Enter the fine print. Often when we make assumptions, we don’t know the questions that we should be asking or what we should be looking for in our contracts will documents. That is why, I recommend hiring an attorney that specializes in the laws of 401k plan. I have learned that some employee benefits law attorneys are not really specialists in the area of 401k plans.

Regarding your 401k advisor, I recommend finding an independent 401k advisor with a specialty in retirement plans and retirement planning to be your guide. Do you know type of advisor is working on your plan? If not, make that your next step.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities offered through LPL Financial. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

 

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